1

Unilever: 3, Procter & Gamble: 0

LONDON -- Most British households contain several products that are made by Procter & Gamble (NYSE: PG) and Unilever (LSE: ULVR.L) , the two largest consumer goods companies in the world. They square off against each other in many markets, in particular washing powder and shampoo, where the two combined account for more than one-third of global sales.

Yet when it comes to the emerging-market nations, Procter & Gamble has been struggling in the last few years, while Unilever has pulled ahead because of three major differences in how it does business. Many companies, even those in very different industries, could learn a lot by looking at how Unilever operates.

History mattersProcter & Gamble's total sales in the emerging markets are slightly higher than Unilever's, but that's no surprise -- it's twice the size of Unilever. But in relative terms, Unilever is the clear leader, as it currently gets 56% of its sales from the emerging markets, compared with just 37% for Procter & Gamble.

Unilever has been far more successful in the emerging markets in large part because its corporate culture has a strong international outlook, having been formed by the merger of Britain's Lever Brothers and the Dutch company Margarine Unie in 1930. So Unilever has strong roots not only in Britain and Holland, but also in many former colonies of the British and Dutch Empires.

In contrast, because Procter & Gamble was founded in Cincinnati, this has meant that America has always been its biggest market. But Procter & Gamble is stronger than Unilever in most of Central and South America because of America's ties to these countries. History matters.

Three big differencesA good performance in the emerging markets is important to multinational companies, because that is where most of the world's economic growth is going to come from in the next couple of decades. So in theory this should compensate for sluggish European and North American markets.

The three main reasons why Unilever is outperforming Procter & Gamble in the emerging markets are as follows:

Unilever pays much more attention to local consumers' needs. It takes account of what consumers can afford by offering less expensive versions of its products, e.g., shampoo that comes in sachets, rather than larger bottles. Procter & Gamble, in contrast, has been much slower to adapt its products to local markets, in some cases having mistakenly assumed that whatever sells well in America will automatically sell well overseas.

Unilever has a more decentralized management structure, so many key decisions will be made by local managers who are in tune with the market. Procter & Gamble will refer more decisions back to its headquarters in Ohio, which takes time and makes it a little bit harder to operate in these countries. Furthermore, Unilever is particularly strong in India because ever since 1932 it has operated there through its 52% owned subsidiary, Hindustan Unilever, which is separately quoted on the Bombay Stock Exchange.

Whenever Unilever finds that a new product developed for the emerging markets is a hit, the company will try it out in the mature markets of the developed world. Procter & Gamble has found it much harder to do this. A good example is Dense Soup Treasure, a soup that's stored as a jelly and was introduced in China in 2007 for consumers who didn't like the current choice of packaged soups. It was such a success that it was launched as Knorr Stock Pot in Europe, where it quickly became a big seller.

This isn't to say that Procter & Gamble isn't doing any of these things; it's just that it hasn't done them as well as Unilever. It has been less effective in coping with the downturn of the developed world by expanding into the emerging markets, and its share price has underperformed as a result.

The futureI expect that Procter & Gamble and Unilever will still be battling each other in several decades' time, when both will be making much higher profits than they are today. There's plenty of scope for both of them to grow in the emerging markets, and unlike many companies, they have a long and successful history of innovation and adaptation.

They will, however, continue to come under pressure from local competitors and smaller multinational consumer goods companies such as Colgate-Palmolive and PZ Cussons, which is best-known for its Imperial Leather soap and is strong in many former colonies, having started life as a trading post in Sierra Leone in 1879.

If I were ever forced to choose just one company in which I could buy shares, both Procter & Gamble and Unilever would be on my (very) short list.

Are you looking to profit as a long-term investor? "Ten Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.

Tony owns shares in Procter & Gamble and Unilever, but he doesn't own shares in any of the other companies mentioned in this article. The Motley Fool owns shares of PZ Cussons.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble, PZ Cussons, and Unilever. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.